JPMorgan Chase agreed to pay $151 million in penalties and voluntary transactions to investors to settle five enforcement actions the Securities and Exchange Commission made public Thursday.
In the most impactful order, the bank’s securities unit made misleading disclosures to brokerage customers who invested in JPMorgan’s “Conduit” slate of private funds products, the SEC found.
The products pooled customer money and invested it in private equity or hedge funds that would later distribute shares of companies that went public.
But JPMorgan did not tell customers it had complete discretion over when and how many shares would be sold, the SEC said. At times, JPMorgan took months to sell the shares, exposing customers to market risk as the value of some shares dropped significantly, the agency said.
JPMorgan agreed to pay $90 million to more than 1,500 Conduit investor accounts and, further, to pay a $10 million fine to the SEC, which will distribute that money to Conduit investors, too.
JPMorgan self-reported to the SEC that certain investors “had complained as a result of the failure to promptly sell certain shares,” the agency said.
The bank agreed to pay $45 million in penalties to resolve allegations that its securities unit failed to disclose the financial incentive JPMorgan and some of its financial advisers would receive by recommending its Portfolio Management Program over third-party managed advisory programs. Assets under management in the program’s strategies nearly tripled, between July 2017 and last month, to more than $30 billion, the SEC said.
JPMorgan will pay $5 million to settle allegations that its investment management unit caused $4.3 billion in prohibited joint transactions, which benefited a foreign money market fund for which JPMorgan served as a delegated portfolio manager.
The bank will pay a further $1 million over another type of prohibited transaction: principal trades. Between July 2019 and March 2021, JPMorgan’s investment management unit engaged in or caused 65 prohibited principal trades with a total notional value of roughly $8.2 billion, the SEC found.
During that time, a JPMorgan portfolio manager directed an unaffiliated broker-dealer to buy commercial paper or short-term fixed income securities from JPMorgan’s securities unit, which the bank’s investment management unit then purchased on behalf of one of its clients, the SEC said. Principal trades are generally prohibited to avoid undisclosed conflicts of interest. JPMorgan notified the SEC of the prohibited trades when the bank learned about them and voluntarily provided documentation promptly, the agency said.
On a fifth charge, the SEC did not impose a penalty. JPMorgan’s securities unit recommended Clone Mutual Funds to its retail brokerage customers even though “materially less expensive” exchange-traded fund products that offered the same investment portfolios were available, the SEC said.
JPMorgan and its representatives “failed to consider these cost differences and failed to have a reasonable basis to believe that their recommendations were in the best interest of the customers,” the agency said.
The bank voluntarily repaid roughly $15.2 million to affected customers and “provided substantial cooperation” with an SEC investigation of the self-reported matter, the agency said. About 10,500 customers made roughly 17,500 purchases of Clone Mutual Funds between June 2020 and July 2022, based on the bank’s recommendations, the SEC said.
“JP Morgan’s conduct across multiple business lines violated various laws designed to protect investors from the risks of self-dealing and conflicts of interest,” Sanjay Wadhwa, acting director of the SEC’s division of enforcement, said in a statement Thursday. “With today’s settlements, which include multiple self-reports and large voluntary payments to harmed investors, JP Morgan is being held accountable for its regulatory failures.”
A JPMorgan spokesperson said the bank is “pleased to have these matters resolved.”
“JPMorgan Chase strives to uphold the highest standards in client service around the world … and [we] remain dedicated to delivering an exceptional experience for our clients,” the spokesperson told Bloomberg.
